Stock and Bond Update: Sell all Stocks?

Five-day trading weeks cannot produce results much flatter for stocks than
last week did, and it contained an expiration to boot! My seven-measure tracking
group produced respective average and median returns either side of zero. Was
this a sign of an approaching turn in the market? I believe it probably was
-- a turn for the worse. And in this case, worse just might turn out to be
much worse. I'm not issuing a flashy "Sell All Stocks Immediately!" pronouncement.
However, the way the situation is potentially shaping up, you might not be
unhappy a month or two from now if you did just that.

The Stock Market

Using my seven-measure tracking group as a proxy, last week was about as flat
as the world was once thought to be. Four of the components rose, three fell,
with returns running in a range of +0.4% for the Russell 2000, to minus 1.1%
for the NASDAQ 100. The overall results were an average return for the group
that was slightly negative, a median return that was about +0.1%.

With almost half of 2004 now behind us, stock returns have to be terribly
disappointing to the bullish camp, considering what expectations were as this
year was beginning. Through yesterday's close, the tracking group was up an
average 0.9% from 12/31/03, although the median return was a better +1.6%.

Following are numbers I believe are even more telltale than year-to-date returns.
As of Friday's close, here is what the tracking group looked like, vis a vis
respective 2004 closing highs. Look also at how long ago, on balance, these
were established.

SELECTED STOCK-MARKET MEASURES

06/18
Close

Recent Highs

Highs to
06/18

Close

Date

S&P 500

1135

1158

02/11

-2.0%

Wil. 5000

11034

11314

03/05

-2.5%

DJIA

10416

10738

02/11

-3.0%

NYSE Comp.

6567

6780

03/05

-3.1%

Value Line

368

387

04/05

-4.9%

NASDAQ 100

1465

1554

01/26

-5.7%

Russ. 2000

571

606

04/05

-5.8%

Average

-3.9%

Median

-3.1%

For months, my technical and fundamental work have been pointing to a bad
June-July period for stocks. Equities will likely escape June in decent enough
fashion: for the month through yesterday, the DJIA, S&P 500 and NASDAQ
100 had registered respective returns of 1.8%, 0.8% and minus 0.9%.

Moreover, Wall Street is about to participate in as well as to accommodate
quarter-end "window dressing," the four times a year when investment managers
try to fool their clients into believing the managers did something they really
did not do during the quarter. These events are not quite as exciting as they
used to be, however, since regulators began expressing increasing displeasure
with the manipulative markups and the like that were once a bit more flagrant
than they are at present.

Nevertheless, I continue to believe what's ahead for stocks, and probably
not far ahead, either, will be quite unpleasant!

Was yesterday's reversal, coming on top of last week's flat performance, the
beginning of this troubled period? Maybe, maybe not, although today should
tell us more. If the market were to produce another configuration like yesterday
-- up early, selling off into the close -- it would not be a good sign.

And against the overall backdrop, let's not forget the current spin being
peddled by those incessantly showcased on CNBC and the other venues in the
regular propaganda loop. The shtick goes that come 6/30, the sky will clear
and everything will be just fine. To wit: Iraq will be turned over to Iraqis
and the long-awaited June meeting of the Federal Open Market Committee will
be out of the way.

Being the spoilsport I am, I see both events as having the strong potential
to breed more problems, not less. Iraq under Iraqi control, despite how nominal
this status might be, is an Iraq one step closer to an out-and-out civil war.
And as far as I'm concerned, when it comes to bad alternatives, US and British
troops are likely better off fighting a guerilla war than being in the middle
of a civil one.

As to next week's FOMC meeting, read on ...

Interest Rates

Have a look at this:

FEDERAL FUNDS FUTURES -- 06/21 VS. 05/03*

Contract

06/21
Close

05/03
Close*

BP
Chg.

Scheduled
FOMC Meetings

June '04

1.02%

1.03%

-1

June 29-30

July '04

1.27%

1.11%

16

No Meeting

Aug. '04

1.51%

1.27%

24

Aug. 10

Sep. '04

1.69%

1.39%

30

Sep. 21

Oct. '04

1.86%

1.51%

35

No Meeting

Nov. '04

2.06%

1.68%

38

Nov. 10

Dec. '04

2.23%

1.83%

40

Dec. 14

Jan. '05

2.33%

1.94%

39

NA

Feb. '05

2.55%

--

--

NA

*Day before latest FOMC meeting.

Although the FOMC should hike the Federal Funds Rate by half a point next
week, it is very unlikely this will happen. Greenspan may speak with bravado
at his confirmation hearing and in other public settings, but I suspect he
is scared to death of the carry-trade monster he personally created. Or maybe
he is delusional and really believes there is no problem. If so, this would
make Greenspan even more dangerous, if that is possible!

At any rate, as matters presently stand, look for the much-expected 25 basis-point
increase in the funds rate on 6/30. On the other hand, I suspect the above
run in fed funds futures has it about right for the balance of 2004 -- a good
chance the funds rate will be at least double what it is at present.

Therefore, in coming weeks, the Treasury curve will increasingly reflect the
possibility, which means higher yields, of course. Which leads me to the following
comment.

At present, the model bond portfolio has a 200,000 (par value) short position
in the Treasury 5.375s of 2/15/31. This is about half the total short the account
is allowed, per its investment guidelines, which limit short positions to 40%.
I am entertaining the idea of taking this position to the maximum that is permitted,
and I may try to do this before next week's FOMC meeting.